Fix WATCA alternative maximum tax implementation

changelog.d/fix-watca-alternative-max-tax.changed.md

@@ -0,0 +1 @@
+Fix WATCA alternative maximum tax implementation to match bill text: use 25.5% tax cap on MAGI above exemption instead of deduction, implement binary eligibility at 175% threshold, switch cost-of-living exemption to CPI-U indexing, and add proper MAGI definitions for both the alternative tax and surtax.

policyengine_us/parameters/gov/contrib/congress/watca/cost_of_living_exemption/alternative_tax_rate.yaml

@@ -0,0 +1,11 @@
+description: The Working Americans' Tax Cut Act alternative maximum tax rate applied to MAGI above the cost of living exemption.
+metadata:
+  label: WATCA alternative maximum tax rate
+  period: year
+  unit: /1
+  reference:
+    - title: Working Americans' Tax Cut Act Section 1A(a)
+      href: https://www.vanhollen.senate.gov/imo/media/doc/working_americans_tax_cut_act_bill_text.pdf#page=2
+
+values:
+  2026-01-01: 0.255

policyengine_us/parameters/gov/contrib/congress/watca/cost_of_living_exemption/amount.yaml

@@ -1,4 +1,4 @@
-description: The Working Americans' Tax Cut Act provides a cost of living exemption amount by filing status, indexed for inflation using the chained CPI.
+description: The Working Americans' Tax Cut Act provides a cost of living exemption amount by filing status, indexed for inflation using CPI-U.
 metadata:
   label: WATCA cost of living exemption amount
   period: year
@@ -7,15 +7,10 @@ metadata:
     - filing_status
   propagate_metadata_to_children: true
   uprating:
-    parameter: gov.irs.uprating
-    rounding:
-      type: downwards
-      interval: 50
+    parameter: gov.bls.cpi.cpi_u
   reference:
-    - title: Working Americans' Tax Cut Act bill summary (via Jeff Stein, WaPo)
-      href: https://x.com/JStein_WaPo/status/2029621495295619363
-    - title: "Democrat's plan would eliminate federal income taxes for half of U.S. workers"
-      href: https://www.washingtonpost.com/business/2026/03/05/middle-class-tax-relief-senate-bill/
+    - title: Working Americans' Tax Cut Act Section 1A(c)
+      href: https://www.vanhollen.senate.gov/imo/media/doc/working_americans_tax_cut_act_bill_text.pdf#page=3
 
 SINGLE:
   2026-01-01: 46_000
@@ -26,8 +21,11 @@ HEAD_OF_HOUSEHOLD:
 JOINT:
   2026-01-01: 92_000
 
+# Surviving spouse treated as joint (sec 1(a)(2)). Not explicitly in bill.
 SURVIVING_SPOUSE:
   2026-01-01: 92_000
 
+# Married filing separately falls under "not described in (B) or (C)",
+# i.e., the 100% default category. Not explicitly in bill.
 SEPARATE:
   2026-01-01: 46_000

policyengine_us/parameters/gov/contrib/congress/watca/cost_of_living_exemption/income_limit_multiple.yaml

@@ -0,0 +1,11 @@
+description: The Working Americans' Tax Cut Act limits eligibility for the alternative maximum tax to filers with MAGI below this multiple of the cost of living exemption amount.
+metadata:
+  label: WATCA cost of living exemption income limit multiple
+  period: year
+  unit: /1
+  reference:
+    - title: Working Americans' Tax Cut Act Section 1A(b)(1)
+      href: https://www.vanhollen.senate.gov/imo/media/doc/working_americans_tax_cut_act_bill_text.pdf#page=2
+
+values:
+  2026-01-01: 1.75

policyengine_us/parameters/gov/contrib/congress/watca/in_effect.yaml

@@ -3,5 +3,8 @@ metadata:
   unit: bool
   label: Working Americans' Tax Cut Act in effect
   period: year
+  reference:
+    - title: Working Americans' Tax Cut Act Section 2(c), 3(d)
+      href: https://www.vanhollen.senate.gov/imo/media/doc/working_americans_tax_cut_act_bill_text.pdf#page=4
 values:
   0000-01-01: false

policyengine_us/parameters/gov/contrib/congress/watca/surtax/in_effect.yaml

@@ -3,5 +3,8 @@ metadata:
   unit: bool
   label: WATCA millionaire surtax in effect
   period: year
+  reference:
+    - title: Working Americans' Tax Cut Act Section 3(d)
+      href: https://www.vanhollen.senate.gov/imo/media/doc/working_americans_tax_cut_act_bill_text.pdf#page=8
 values:
   0000-01-01: true

policyengine_us/parameters/gov/contrib/congress/watca/surtax/rate/joint.yaml

@@ -1,28 +1,37 @@
-description: The Working Americans' Tax Cut Act millionaire surtax rate for joint filers, based on adjusted gross income.
+description: The Working Americans' Tax Cut Act millionaire surtax rate for joint filers, based on modified AGI.
 metadata:
   type: marginal_rate
   threshold_unit: currency-USD
   rate_unit: /1
   period: year
   label: WATCA millionaire surtax joint rate
   reference:
-    - title: Working Americans' Tax Cut Act bill summary (via Jeff Stein, WaPo)
-      href: https://x.com/JStein_WaPo/status/2029621495295619363
+    - title: Working Americans' Tax Cut Act Section 59B(a), (c)
+      href: https://www.vanhollen.senate.gov/imo/media/doc/working_americans_tax_cut_act_bill_text.pdf#page=5
 
 brackets:
   - threshold:
-      0000-01-01: 0
+      2026-01-01: 0
     rate:
-      0000-01-01: 0
+      2026-01-01: 0
   - threshold:
-      0000-01-01: 1_500_000
+      values:
+        2026-01-01: 1_500_000
+      metadata:
+        uprating: gov.bls.cpi.cpi_u
     rate:
-      0000-01-01: 0.05
+      2026-01-01: 0.05
   - threshold:
-      0000-01-01: 3_000_000
+      values:
+        2026-01-01: 3_000_000
+      metadata:
+        uprating: gov.bls.cpi.cpi_u
     rate:
-      0000-01-01: 0.10
+      2026-01-01: 0.10
   - threshold:
-      0000-01-01: 7_500_000
+      values:
+        2026-01-01: 7_500_000
+      metadata:
+        uprating: gov.bls.cpi.cpi_u
     rate:
-      0000-01-01: 0.12
+      2026-01-01: 0.12

policyengine_us/parameters/gov/contrib/congress/watca/surtax/rate/single.yaml

@@ -1,28 +1,37 @@
-description: The Working Americans' Tax Cut Act millionaire surtax rate for single filers, based on adjusted gross income.
+description: The Working Americans' Tax Cut Act millionaire surtax rate for single filers, based on modified AGI.
 metadata:
   type: marginal_rate
   threshold_unit: currency-USD
   rate_unit: /1
   period: year
   label: WATCA millionaire surtax single rate
   reference:
-    - title: Working Americans' Tax Cut Act bill summary (via Jeff Stein, WaPo)
-      href: https://x.com/JStein_WaPo/status/2029621495295619363
+    - title: Working Americans' Tax Cut Act Section 59B(a)
+      href: https://www.vanhollen.senate.gov/imo/media/doc/working_americans_tax_cut_act_bill_text.pdf#page=5
 
 brackets:
   - threshold:
-      0000-01-01: 0
+      2026-01-01: 0
     rate:
-      0000-01-01: 0
+      2026-01-01: 0
   - threshold:
-      0000-01-01: 1_000_000
+      values:
+        2026-01-01: 1_000_000
+      metadata:
+        uprating: gov.bls.cpi.cpi_u
     rate:
-      0000-01-01: 0.05
+      2026-01-01: 0.05
   - threshold:
-      0000-01-01: 2_000_000
+      values:
+        2026-01-01: 2_000_000
+      metadata:
+        uprating: gov.bls.cpi.cpi_u
     rate:
-      0000-01-01: 0.10
+      2026-01-01: 0.10
   - threshold:
-      0000-01-01: 5_000_000
+      values:
+        2026-01-01: 5_000_000
+      metadata:
+        uprating: gov.bls.cpi.cpi_u
     rate:
-      0000-01-01: 0.12
+      2026-01-01: 0.12

policyengine_us/reforms/congress/watca/working_americans_tax_cut_act.py

@@ -1,40 +1,89 @@
 from policyengine_us.model_api import *
 from policyengine_core.periods import period as period_
-from policyengine_core.periods import instant
 
 WATCA_REFERENCES = [
     {
-        "title": "Working Americans' Tax Cut Act bill summary (via Jeff Stein, WaPo)",
-        "href": "https://x.com/JStein_WaPo/status/2029621495295619363",
-    },
-    {
-        "title": "Democrat's plan would eliminate federal income"
-        " taxes for half of U.S. workers",
-        "href": "https://www.washingtonpost.com/business/"
-        "2026/03/05/middle-class-tax-relief-senate-bill/",
+        "title": "Working Americans' Tax Cut Act",
+        "href": "https://www.vanhollen.senate.gov/imo/media/doc/working_americans_tax_cut_act_bill_text.pdf",
     },
 ]
 
 
 def create_watca() -> Reform:
-    class watca_cost_of_living_exemption(Variable):
+    class watca_alternative_tax_magi(Variable):
+        value_type = float
+        entity = TaxUnit
+        label = "WATCA alternative tax modified AGI"
+        definition_period = YEAR
+        unit = USD
+        reference = WATCA_REFERENCES
+        documentation = "Section 1A(d): AGI + foreign income exclusions (sec 911, 931, 933) + non-taxable Social Security."
+
+        adds = [
+            "adjusted_gross_income",
+            "foreign_earned_income_exclusion",
+            "specified_possession_income",
+            "puerto_rico_income",
+            "tax_exempt_social_security",
+        ]
+
+    class watca_surtax_magi(Variable):
         value_type = float
         entity = TaxUnit
-        label = "WATCA cost of living exemption"
+        label = "WATCA surtax modified AGI"
         definition_period = YEAR
         unit = USD
         reference = WATCA_REFERENCES
+        documentation = (
+            "Section 59B(d): AGI - investment interest deduction (sec 163(d))."
+        )
 
         def formula(tax_unit, period, parameters):
             agi = tax_unit("adjusted_gross_income", period)
+            # Sec 163(d) limits the deduction to net investment income;
+            # PolicyEngine does not yet model that limitation, so gross
+            # investment interest expense is used as a proxy.
+            investment_interest = add(tax_unit, period, ["investment_interest_expense"])
+            return max_(0, agi - investment_interest)
+
+    class watca_alternative_tax_eligible(Variable):
+        value_type = bool
+        entity = TaxUnit
+        label = "Eligible for WATCA alternative maximum tax"
+        definition_period = YEAR
+        reference = WATCA_REFERENCES
+        documentation = "Section 1A(b): MAGI < 175% of exemption, and not claimed as dependent on another return."
+
+        def formula(tax_unit, period, parameters):
+            magi = tax_unit("watca_alternative_tax_magi", period)
             filing_status = tax_unit("filing_status", period)
             p = parameters(period).gov.contrib.congress.watca.cost_of_living_exemption
-            amount = p.amount[filing_status]
-            phase_out_end = amount * p.phase_out_multiple
-            phase_out_range = phase_out_end - amount
-            uncapped = (phase_out_end - agi) / phase_out_range
-            fraction = clip(uncapped, 0, 1)
-            return amount * fraction
+            exemption_amount = p.amount[filing_status]
+            income_limit = exemption_amount * p.income_limit_multiple
+            income_eligible = magi < income_limit
+            head_dependent = tax_unit("head_is_dependent_elsewhere", period)
+            spouse_dependent = tax_unit("spouse_is_dependent_elsewhere", period)
+            not_dependent = ~head_dependent & ~spouse_dependent
+            return income_eligible & not_dependent
+
+    class watca_alternative_max_tax(Variable):
+        value_type = float
+        entity = TaxUnit
+        label = "WATCA alternative maximum tax"
+        definition_period = YEAR
+        unit = USD
+        reference = WATCA_REFERENCES
+        documentation = (
+            "Section 1A(a): 25.5% of MAGI above the cost of living exemption."
+        )
+
+        def formula(tax_unit, period, parameters):
+            magi = tax_unit("watca_alternative_tax_magi", period)
+            filing_status = tax_unit("filing_status", period)
+            p = parameters(period).gov.contrib.congress.watca.cost_of_living_exemption
+            exemption_amount = p.amount[filing_status]
+            rate = p.alternative_tax_rate
+            return max_(0, magi - exemption_amount) * rate
 
     class watca_millionaire_surtax(Variable):
         value_type = float
@@ -43,44 +92,35 @@ class watca_millionaire_surtax(Variable):
         definition_period = YEAR
         unit = USD
         reference = WATCA_REFERENCES
+        documentation = (
+            "Section 59B: Surtax on high income individuals based on modified AGI."
+        )
 
         def formula(tax_unit, period, parameters):
-            agi = tax_unit("adjusted_gross_income", period)
+            magi = tax_unit("watca_surtax_magi", period)
             p = parameters(period).gov.contrib.congress.watca.surtax
             filing_status = tax_unit("filing_status", period)
+            # Sec 59B(c) specifies "joint return under section 6013".
+            # Surviving spouse is treated as joint here, following common
+            # IRS convention (sec 1(a)(2) treats surviving spouses as joint filers).
             joint = (filing_status == filing_status.possible_values.JOINT) | (
                 filing_status == filing_status.possible_values.SURVIVING_SPOUSE
             )
             return where(
                 joint,
-                p.rate.joint.calc(agi),
-                p.rate.single.calc(agi),
+                p.rate.joint.calc(magi),
+                p.rate.single.calc(magi),
             )
 
-    class taxable_income(Variable):
-        value_type = float
-        entity = TaxUnit
-        label = "IRS taxable income"
-        unit = USD
-        definition_period = YEAR
-
-        def formula(tax_unit, period, parameters):
-            agi = tax_unit("adjusted_gross_income", period)
-            exemptions = tax_unit("exemptions", period)
-            deductions = tax_unit("taxable_income_deductions", period)
-            watca_exemption = tax_unit("watca_cost_of_living_exemption", period)
-            return max_(0, agi - exemptions - deductions - watca_exemption)
-
     class income_tax_before_credits(Variable):
         value_type = float
         entity = TaxUnit
         definition_period = YEAR
         label = "income tax before credits"
         unit = USD
-        documentation = "Total (regular + AMT) income tax liability before credits"
 
         def formula(tax_unit, period, parameters):
-            base = add(
+            standard_tax = add(
                 tax_unit,
                 period,
                 [
@@ -89,19 +129,35 @@ def formula(tax_unit, period, parameters):
                     "alternative_minimum_tax",
                 ],
             )
+            alternative_max = tax_unit("watca_alternative_max_tax", period)
+            eligible = tax_unit("watca_alternative_tax_eligible", period)
+            # The alternative max tax cap is not separately gated by
+            # in_effect because this variable only exists when the reform
+            # is loaded, which already requires in_effect = true.
+            tax_after_cap = where(
+                eligible,
+                min_(standard_tax, alternative_max),
+                standard_tax,
+            )
             p = parameters(period).gov.contrib.congress.watca.surtax
             surtax = where(
                 p.in_effect,
                 tax_unit("watca_millionaire_surtax", period),
                 0,
             )
-            return base + surtax
+            # Known limitation: Sec 59B(e)(3) says the surtax should not
+            # be treated as tax for purposes of credits or AMT. Adding it
+            # here (before credits) means credits could offset it.
+            # Fixing this requires restructuring the tax computation chain.
+            return tax_after_cap + surtax
 
     class reform(Reform):
         def apply(self):
-            self.update_variable(watca_cost_of_living_exemption)
+            self.update_variable(watca_alternative_tax_magi)
+            self.update_variable(watca_surtax_magi)
+            self.update_variable(watca_alternative_tax_eligible)
+            self.update_variable(watca_alternative_max_tax)
             self.update_variable(watca_millionaire_surtax)
-            self.update_variable(taxable_income)
             self.update_variable(income_tax_before_credits)
 
     return reform